By Bernard Hickey
Fonterra has increased its forecast payout for the current 2013/14 season by a further 50c/kg to a record high NZ$8.30/kg as it experiences strong demand for milk powder from China, despite its recent botulism scare.
This is Fonterra's third payout forecast increase in less than two months and takes the increase to NZ$1.30/kg since late July.
Combined with an expected 5% increase in production after last year's drought, the higher payout is expected to boost annual farmer incomes by more than NZ$4 billion from a year ago to almost NZ$13.3 billion.
However, Fonterra also warned the high milk price would hurt profits for shareholders, although it pledged to keep its forecast dividend of 32c/share by drawing on its cash flows and strong balance sheet.
The total payout for fully 'shared-up' farmers would therefore be NZ$8.62/kg, which would surpass the payout of NZ$7.90/kg (NZ$7.59/kg milk payout and 31c of dividends) in 2007/08, although 24c of that was then retained by the cooperative to bolster its capital stocks as it grappled with high debt loads during the Global Financial Crisis. The total payout in 2010/11 was NZ$7.90/kg, including NZ$7.60/kg as the milk payout and 30c/share of dividends. (Corrects to make clear the previous record high total payout was 2010/11 not 2007/08)
Fonterra increased its payout forecast by 30c/kg on August 27 and by 50c/kg on July 31. The payout forecast increases and strong demand from China for milk powder are in stark contrast to the botulism scare happening at the same time. It forecast the final payout for the just completed 2012/13 year in May at NZ$6.12/kg, including a 32c/share dividend.
“The record Forecast Farmgate Milk Price reflected continuing strong international prices for dairy, particularly Whole Milk Powder driven by robust demand from Asia, especially China. We are still facing high levels of volatility around the world,” said Fonterra Chairman John Wilson.
Chief Executive Theo Spierings said the business, however, also faced headwinds, especially in the first half of the current financial year. He said Fonterra expected earnings would be significantly lower than the strong performance in the first half of 2013.
“The higher cost of goods will make it more difficult to drive earnings growth in our consumer and foodservice businesses in the first half of this financial year. We also expect to see a negative impact on our product mix returns during the first half of the current year as milk powder prices significantly outpace the relative prices of cheese and casein," Speirings said.
“Prospects for the second half look more positive for our consumer businesses, but remain uncertain for NZ Milk Products," he said.
“Our estimated dividend of 32 cents per share for 2014 currently remains unchanged. Fonterra can draw upon its balance sheet and cash flow performance to support the estimated dividend."
Spierings said it was difficult to predict when the extreme price volatility between products would reverse, "but expectations are that the impact is likely to be short-term."
Reaction
The New Zealand dollar rose around 20 basis points to 83.35 USc in afternoon trade after the announcement.
Westpac Chief Economist Dominick Stephens said Fonterra's milk price forecast still assumed a 10% fall in GlobalDairyTrade auction prices between now and June 2014.
"Should GlobalDairyTrade prices continue to defy gravity, the milk price forecast could be revised higher still," Stephens said.
"Our forecast further assumes that the New Zealand dollar will remain around 83 cents against the US dollar," he said.
(Updated with chart, corrects previous record to 2010/11 from 2007/08, details expected NZ$4 billion lift in receipts this year)
26 Comments
However, Fonterra also warned the high milk price would hurt profits for shareholders, although it pledged to keep its forecast dividend of 32c/share by drawing on its cash flows and strong balance sheet.
So, some of the record payout is coming from drawing down equity?
Well Colin , Stephen, still need to see the cfwd hedge losses (?) as a component of their projections....
What with Mr ASB economist...Dominico the majico touting a steady .83 U.S......?
Somebody out there is keeping the dream alive...
BTW Bernard is it cause for Farmers to celebrate or their over extended Bankers....?
An extra $4bn into our economy! Thats great news isnt it?
Fantastic - I hope the proceeds can go someway towards relieving the over indebted farmers of their liabilities.
We all need high earning individuals and corporations to pay their share of taxes for the much needed public infrastructure to maintain this new level of income.
Read a article a few years ago on a farmer up north, Dargiville way, who stated he would rather pay interest than tax. So maybe not much hope for either front for you there Stephen.
Personaly, having finally gotten rid of our life sucking block, I'm almost looking forward to paying some tax /lots of tax due to this projected payout.
Oh dear, redcows it would seem your potential tax contribution has been consumed by Fonterra.
Fonterra has announced it made a NZ$736 million net profit for the 2012/13 financial year, up 18% on the previous year because of NZ$109 million of benefits from tax credits and lower interest costs. Read more
Maybe Mr Wills will moderate his demands?
Yet one of the most essential services for farmers and the wider community is the nation’s roads. For rural folk like me, all roads are nationally significant but government spending has not kept pace with roading cost inflation. Federated Farmers wants the Government’s roading share increased from 50 to 90 percent, using revenue from vehicle registration, fuel taxes and licensing for roads. All of this would allow councils to reduce their local rates burden while being much fairer; as many road users are not local.
im just saying that they pay plenty of tax re the roads( about $36m per year) and doubt that they do the ammount of damage their annual ruc contribution makes.
The point is that revenue raised on the roads/rates etc should be spent on the roads and not siphoned off like M Cullen used to ..
Don m,
Sounds like Fonterra pay their share, so no complaints there.
It sounds like you may differ from Mr Wills who pretty clearly wanted some of the petrol tax paid by city folk not spent on their roads or public transport, but on country roads. National are building some roads, (as did Labour) but of course also have a massive deficit, so it's hard to tell if they have followed Mr Cullen's example.
Is there some key government spending you would not do, or other taxes you would increase to achieve this end?
I thought i read somewhere that National have agreed to spend ALL of roading revenue raised on roads.(just which roads well that is up for debate)
im not sure why the Eketahuna dairy farmer shopuld be subsidising Auckland public transport anyway..im just glad that the roading network as a whole will be upgraded..
after a quick internet search (dodgy broadband in the sticks)the only figures i could find were from infometrics which were for 1992-2003/4.........in which every year road tax revenue exceeded road expenditure by an average of 42%.
so we as road users have been getting a rough deal for some time..
Don,
It would seem more likely, given the road kms per person in the country is a lot higher than the roads per person in the cities, that city folk are in fact subsidising the Eketahuna farmer in terms of road building. As it happens up to a point this doesn't worry me; am sure we need country roads to be workable, and the whole burden on the farmer would seem tough. It is not though city people pushing for change it seems.
I suspect if Aucklanders were asked whether all their petrol tax should go on roads in Auckland; or whether they would be happy to have less on roads, and a good share on public transport options, a majority would opt for the public transport mix.
Am not aware of the breakdown anywhere, and if country folk believe they are hard done by, it would seem useful that the breakdown was published.
Looking in the 2012 budget (on page 59) it seems RUCs were ~$1 billion, and petrol taxes $1.5 billion. Both are a little lower than my intuitive expectation, and expenditure on roads probably is considerably higher than that number- albeit capital expenditure in many cases.
Where the taxes are collected is unclear.
Simplistically my intuitive expectation is that a quarter to a fifth is collected in Auckland, if it has a third of the population. What other income and expenditure is collected by region? Who knows; and just maybe it is best we don't know. But if regional jealousies become very strong, maybe it is best to publish the breakdown.
Historically rural roads have been provided at world leading km per person rates but motorways and public transport options like commuter rail have not. This seems to indicate that rural people have benefited more from the transport spend compared to city folk.
I think the problem is a low spend on transport rather than one group susbsidies another. And that the solution should be regions get greater tax resources so they can provide their own infrastructure. There is two good reasons for this. Each region has different transport needs, depending on the sizes of their cities and rural areas plus geographies are very different throughout NZ. Secondly by making each region responsible for their own transport infrastrucutre you introduce a competitive element that hopefully raises productivity.
The legacy of two car plus households is coming to an end - cheap Japanese imports are now a figment of someone else's imagination. Piling on the roading costs is just not possible for the average motorist - reduced pertol consumption statistics confirms the reality - hence the Z float.
The cost of running a car in New Zealand can be as expensive as a dollar for every kilometre driven, largely driven by the most invisible cost of the lot, the falling value of the car itself.
A small petrol hatchback was found to be the cheapest car to operate while a diesel vehicle with an engine capacity above 3000cc was considered the most expensive.
The biggest costs were depreciation, interest rates, petrol, insurance, and repairs and maintenance.
AA motoring advice manager Andrew Bayliss said depreciation represented about a third of the cost of running a car.
For the smallest petrol cars, depreciation started at about 23c a kilometre.
"People say ‘Oh hang on a minute but petrol's gone up a little bit in the last 12 months'.
"Well, it has but the value of vehicles has perhaps come back a little bit . . . all these other little things are pretty insignificant compared with the capital cost and the depreciation." Read more
If we appreciated the benefits of a true cooperative model, billions more would be remaining in our economy. Instead political agendas defined by questionable free market rationale and farmers propensity to choose their back pockets ahead of long term stability, means a significant proportion remains offshore, not contributing to greater productivity and progress.
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